KKR consortium buys Seoul office tower from NPS

  • 2020-02-29

A consortium of KKR & Co. and two South Korean companies have closed the acquisition of a Seoul office tower from the National Pension Service (NPS) for an estimated 500 billion won ($413 million), in a value-add investment in the 42-year-old building.

The purchase of Namsan Square in central Seoul marked KKR’s fourth real estate investment in South Korea, two of which it had already exited, including a logistics center development, according to KKR on Feb. 28.

NPS has reaped capital gains of about 180 billion won from the transaction in a decade. It had acquired the property for 315 billion won from Macquarie in 2009, which generated proceeds of 100 billion won for the Australian bank, too.

The consortium comprising KKR, IGIS Asset Management, and real estate developer SK D&D had submitted the highest bid for the 23-story tower among the bidders, despite valuation concerns and the prospect of limited rental revenue growth for Seoul office buildings.

It was chosen as a preferred buyer in November 2019, beating a group led by New York-based investment firm Angelo, Gordon & Co. and one including Mirae Asset Daewoo Co. Ltd.

The purchase price of around 500 billion won was seen high for the property, built in 1978, given its location outside the three major core business districts of Seoul and the annual rental revenue of 21.3 billion won currently.

“The consortium plans to enhance the workspace environment by upgrading the building façade, restrooms and the retail arcade without disruption to existing tenants,” KKR said in a statement on Feb. 28.

Namsan Square has a floor space of 75,252 square meters and is about 85% occupied.

In 2018, KKR and IGIS Asset had acquired Renaissance Parc, a mixed-use real estate development project in Gangnam, one of the three core business areas in Seoul and its land for 1.15 trillion won.

They have injected an additional 1 trillion won gathered from the NPS and other investors into the development project.

RATE CUT EXPECTATION

The average investment return from large commercial buildings in central Seoul have fallen below the levels of Paris office buildings which Korean institutional investors had snapped up early last year.

Abundant liquidity from pension funds and other retirement funds, however, have been accelerating capital inflows to the real estate market in the slowing economy, with the Bank of Korea widely expected to make another rate cuts from the current 1.25%.

Office building transactions in Seoul in 2019 are estimated to have matched the previous year’s 12 trillion won, a record for the Seoul commercial property market.

“Compared with Europe where benchmark rates are already in negative territory, foreign investors seem to expect the Bank of Korea to cut interest rates again. Given this, building prices may have room to rise further,” an asset management company source told the Korean Investors.

This week, the Bank of Korea revised down its economic growth forecast for this year to 2.1% from 2.3% as the rapid spread of coronavirus was taking a heavy toll on many industries.

Like other foreign real estate investors, KKR has been chasing opportunistic and value-add investments in South Korea, the segments shunned by Korean institutional investors because of the risks.

Myeonghan Yu, research head of Avison Young Korea, said that institutional investors, armed with real estate blind-pool funds, were now expanding their targets into small to medium-sized buildings in Gangnam and the central business district of Seoul.

The flight to safety trend is likely to continue to spur demand in the Seoul office building market, outweighing valuation fears.

“If an economic crisis struck, the prices of corporate bonds and stocks could halve. But real estate prices in global gateway cities have never fallen by more than 30% and made a quick recovery,” said a Korean savings fund source.

By Hyun-il Lee

hiuneal@hankyung.com

<Edited by Yeonhee Kim>